How much additional state funding will Anglo need?

Alan Dukes, the chairman of Anglo Irish Bank (“Anglo”) has gone very quiet of late. It seems only yesterday that the former finance minister and former leader of the Fine Gael party couldn’t contain himself with proclaiming his projections of Irish banks generally needing an additional €50bn of capital to cover losses and to provide a normalised banking service; this at a time when governor of the Central Bank of Ireland (CBI), Patrick Honohan was claiming €10bn was the more likely sum. That was only back in February of this year, so we shouldn’t have forgotten it all just yet. Back in February, Alan’s estimate was that Anglo should be okay with the €29-34bn estimated in late 2010 which was a relief because only a few months earlier there had been talk of losses of nearly €40bn. And subsequently the claim from Anglo’s CEO, Mike Aynsley in April 2011 was that the zombie Anglo wouldn’t need more than the €29.3bn already provided. But is that still the case?

At the end of May 2011, we had the remaining stress test results announcement from the CBI in respect of Anglo and INBS. The announcement was peculiar in that it said the loan loss estimates for Anglo were the same as last year, but the CBI didn’t say that Anglo wouldn’t need more capital. As noted on here, it is almost certain that INBS will need an additional injection. But the CBI will not respond to queries from here as to the additional capital needs of INBS, now merged with Anglo to form IBRC. The implication from the stress test announcements in May was that no new capital would be needed, but the actual announcements were narrower than that, they just said loan losses at the two institutions were in line with previous estimates – there’s a difference, for example, non-loan losses or operating expenses might drive up the capital requirements.

And this morning, Emmet Oliver in the Irish Independent reports that Anglo is issuing a new bond so as to raise additional money from the CBI and the ECB. As far as I can see, Anglo has not issued a new bond since late 2010 so this bond issue is extraordinary. Remember Anglo has already been provided with funding totalling €29.3bn, and now it appears to need additional funds. Neither the Department of Finance or Anglo has responded to a query seeking information on the quantum of the bond and whether Anglo in fact needs more capital beyond that previously announced – €29.3bn. The CBI may respond.

There is a feeling that Anglo and INBS’s drag on the nation’s purse is becoming obscured. Yesterday, RTE reported on documents obtained from the Central Bank of Ireland and Department of Finance relating to the period from September 2010 to January 2011 which shows a murky system whereby so-called “letters of comfort” were sent from the Department of Finance to the CBI. In September 2010, the communication indicated an “intention” – not even providing a commitment let alone a legally enforceable agreement – to meet any losses incurred by the CBI on liquidity lending to AIB. “it would be the intention that the CBI would receive payment to make good any shortfall” – that’s two “would”s and an “intention” in one clause, hardly a commitment

Later letters were more formal and seemed to have this form of words “it is the policy of the Government that the Bank should not incur a loss on the provision of emergency liquidity assistance to support Irish credit institutions. Accordingly if any such loss is in prospect, the Government will [redacted] provide for the Bank to receive payment to make good any shortfall” The redacted words (it looks like there are about three redacted words) might be very significant indeed.

But here we have a government making commitments on behalf of the nation, commitments that have not been presented to the Oireachtas – and remember the original bank guarantee had expired in September 2010 – neither to the Dail or the Seanad or its committees, and yet may end up costing the nation billions. Anglo was in receipt of €28.1bn of emergency liquidity assistance from the CBI in December 2010 (and €45bn in total funding from the ECB and the CBI, combined). That was the theoretical maximum commitment which the State might have been expected to meet if Anglo got into trouble and its collateral was worthless. And this morning we learn that Anglo is to issue new bonds, which will presumably also require a state commitment.

Isn’t it time for this murkiness to be replaced with clarity on the funding of Anglo, the commitments made on the nation’s behalf, the final estimate of the cost of bailing out that zombie bank and why new bonds are needed today to fund Anglo given that the bank has already received €29.3bn of state funding.

UPDATE: 19th July, 2011. The CBI has responded to queries to state that, in respect of the Anglo prospectus reported this morning, “this prospectus relates to liquidity/monetary policy operations and funding, and does not relate to the banks capital position” and that in respect of Anglo/INBS, the CBI did include in the May stress tests the information on Anglo/INBS’s current capital requirements. This is what I believe the CBI is referring to:

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The redacted words (it looks like there are about three redacted words) might be very significant indeed. My guess is 4 short ones ‘as best it may’ In legal speak it basically means ‘if we feel like it’

Very interesting as Anglo are looking for final offers on their US loan book by 9th August. Access to the “data room” now available if you ask Eastdil Secured nicely. Confidentiality Agreement required.

Is there any information on what restrictions there are on the ELA? I guess they need ECB approval. Otherwise anglo should be used to hoover up discounted Irish sovereign bonds.

On INBS loss reserves/capital, back in Sept 2010 most of the writedowns seemed to be on developer loans. I’d have thought the 5.4bn mostly related to this. The Blackrock exercise hit resi mortgages pretty hard (ask ILP). So I’d have expected the INBS rump should have been hit. Let’s face it, their mortgage book isn’t pretty http://www.examiner.ie/business/inbs-33bn-loss-final-act-of-tragedy-155129.html

“John Hemming, the Liberal Democrat MP who used parliamentary privilege to reveal that Ryan Giggs was the footballer behind the recent superinjunction, is a leading Pibs-holder and part of the campaign. The group intends to write to the Irish government to condemn its “lack of common decency and fair play”.”

What was written on here was “The UK’s Independent newspaper reports that John is to write to the Irish government complaining at the “lack of common decency and fair play””

I acknowledge here that it mightn’t be you personally that “condemns the lack of decency and fair play” but if the Independent report is correct, you are part of a group that intends writing condemning the Irish government’s “”lack of common decency and fair play””

The tweet has been corrected to “ILP: Scotchstone action also involves John Hemming MP’s, mt place John’s support of BoI subordinated bondholders in context ”

In respect of your suggestion for ILP involving “the Irish Taxpayer paying less – probably zero. I don’t know why the government are set on a proposal that means paying 4bn EUR.”

@John, out of interest I note that in local press reporting that in relation to the group of Irish Life and Permanent shareholders attempting to de-rail the Irish government’s plans for recapitalising that bancassurer

I’m afraid the reporting on here is very mixed. There are very good, very informative articles (the media summaries on the Greek crisis were excellent); but also some very seriously misinformed ones: NWL for instance was reporting on the two court-cases against BoI tender as if they were one and the same; the article on the HF lawsuit suggested authors did not read (understand?) the filed papers which I personally had sent them, etc. It seems the project — whose idea I praise — is too ambitious for the limited staff resources. Which is a pity because a project like NWL is very much needed.

Thank you for your comment. Yes misunderstandings can happen. It was not clear that there were two separate applications at London’s High Court in respect of two different sets of Bank of Ireland subordinated bondholders – one involving many individuals in relation to B&W PIBS was confused with the one by hedge funds with LT2 subordinated bonds. The individuals were assumed to have invested via hedge funds and the LT2 subordinated bonds were assumed to have been the umbrella class of which B&W PIBS were a subset.
The entry reporting what is now understood on here to be the second application is here – https://namawinelake.wordpress.com/2011/06/21/bank-of-ireland-sued-by-disgruntled-bondholders-in-the-uk%E2%80%99s-high-court/ , and you can make your own mind up as to whether there was a mischaracterisation of the basis for the application.

I hope Reg would agree however that this is a forum where commenters are given ample license to set out their views in a safe environment where respect of contrarian views is promoted.

And in that vein, it would be very helpful to understand John Hemming’s suggestion for ILP, the one involving “the Irish Taxpayer paying less – probably zero. I don’t know why the government are set on a proposal that means paying 4bn EUR.” On another forum investors in Bank of Ireland who expressed similar claims for Bank of Ireland became very silent, very quickly when attempts were made to tease out the detail of their suggestions, because lo and behold, although their suggestions involved the Irish government injecting less cash, it seemed to involve the bondholders taking equity stakes which maximised the value of their investment and returned significantly more to the bondholders than the buyback programme would have. So the apparent “kindness” was nothing of the sort, it was a pretty crude means of securing a better return on investments in banks which wouldn’t remain open were it not for the guarantees and financial support from the Irish state.

Re John Hemming’s plans this is from a posting on the hon. Member for Birmingham, Yardley’s blog posted on 18th June 2011-
“My concern about the proposals from the Irish Government (aka Bank of Ireland) is that they are designed to protect the equity at the cost of the subordinated holders. This turns on its head the normal processes.

There is no need for the Irish government to put any more cash in than is proposed under the current scheme. In fact if the Sub holders were given a normal deal then the Irish government would put less money in.

However, the plan the Irish government has involves preferring one set of creditors above others.”

Does Mr Hemming expect to be repaid while the irish taxpayer takes the full risk

Upshot is that if we accept the projections below, we’re more or less fine for funding to end of 2013.

(1)the deficit which is difficult to assess because we have quite a range of forecasts of our GDP in the next two years ranging from the most optimistic the ESRI with 2% in 2011 and 3% in 2013 to the most pessimistic, Ernst and Young with -2.3% in 2011 and 1.1% in 2012. But the deficit projection doesn’t look unreasonable.

(2) the bank recapitalisation of €19bn which is after €5bn of mitigation actions (buying back bondholders at a discount, the BoI rights issue and perhaps some deleveraging). The view on here is that the €19bn is too little and indeed if the March 2011 stress tests were re-run then the deterioration in our sovereign bond, residential and commercial property prices would indicate an additional requirement in the €10bn range.

But yes overall, if you accept the assumptions then we will need just €1.8bn in market funding in 2013 to get through (and also leave us with €5bn in reserve).

However we have a €11bn bond maturing in Jan 2014, so any 2nd bailout would be needed well before the end of 2013. – http://t.co/z3wO2OV – on the other hand, confidence might have returned to the extent that we can borrow on the markets before 2014, but I think many would pooh-pooh that suggestion.

Hard to state one way or another that “we are fine” but I think it must be acknowledged that it appears we have sufficient funds till end of 2013. A lot can happen in a week or a month, so looking beyond 2013 is difficult.

The exposure of Irish banks to non-Irish peripheral bonds is limited and although anything is possible, a larger haircut in sovereign debt recoveries is circular – i.e. a larger recapitalisation required but lower national debt figures, but an inability to borrow.

I accept the point though on commercial and residential mortgages/valuations and the likelihood of additional capital required.

But listening to Charles Gallagher, Abbey Plc, about availability of UK mortgages wouldn’t fill you in over confidence on the UK market either.

I am not overly confident but I do feel some of the commentary on this and especially other forums are one sided, overly negative, and hard to have a balanced view.

We have lived in high debt/GDP environment before, and managed to get it reduced (granted it is easier to pick the low hanging fruit) – we have lived in a balanced government budge environments and although tough to achieve, I do believe the vast majority understand the logic of this. Ireland is an island and a very open economy and unfortunately more subject to international forces as oppose to internal decisions. But I genuinely believe Ireland will not default on its obligations, and although the process will take longer, will survive within the Euro also.

@jj, the NTMA spokesperson has now replied to queries from here and an entry should be posted in the next couple of hours. As to commentary, be it positive or negative,here is a table that will be posted with the entry at lunchtime. It shows GDP projections for 2011 and 2012. As you can see there is a range. And you shouldn’t therefore be surprised that there is a range of perspectives given on here.

In response to living in a high debt:GDP environment before, that’s true. But many believe the differences between today and the 1980s make comparison difficult. Take a look at a couple of previous comments on here

On BoI my argument has been that the capital heirarchy should apply. Unless the equity is deemed valueless then the debt in the heirarchy has full value.

With Anglo the equity went and much of the debt and potentially some of the senior bonds.

On IPM what they should do is a jv with a major international bank to get leverage. The shareholders may lose a lot to cover future losses, but that is how things should work. What the Irish government is trying to do is to have a forced sale of the UK loan book to reduce leverage.

On IPM what they should do is a jv with a major international bank to get deposits. The shareholders may lose a lot to cover future losses, but that is how things should work. What the Irish government is trying to do is to have a forced sale of the UK loan book to reduce leverage whilst putting EUR 4bn in as capital which may not produce a return to the Irish Taxpayer beyond what it costs the taxpayer.

Following reforms to governance in Irish financial institutions, Scotchstone’s appointment of a representative to the board of ILP will be contingent on approval from the Financial Regulator, Matthew Elderfield.

We’d still love to hear more on the alternative plans being suggested by the shareholders of which John is one.

@christy, well the Central Bank of Ireland claims the new bond being issued by Anglo, the first in 2011, is purely to access funding and doesn’t affect Anglo’s capital position. And the Bank says that its stress test results in May 2011 indicate that no additional capital is needed for Anglo. The Bank claims that its conclusions from its examination of Anglo in 2010 remain valid. Skeptics might point to the Bank claiming in January 2011 that €10bn would have been sufficient to recapitalise the banks, and the figure after the March 2011 stress tests rose to €19-24bn. Skeptics might also point to a series of underestimates in 2010.

As regards the new bond, even if it does not have a capital dimension and is solely to access funding, it still presumably creates a state liability as the Bank seems to be looking for “comfort” from the Government to cover any shortfall should Anglo in some way default on an arrangement to secure funding.

IPM are selling off cheap to rid of dodgy loans, and making up the difference with taxpayer money which becomes the Bank’s capital, when they should merge with a bank with a better balance sheet instead.